Post by Dave on Mar 3, 2023 8:47:17 GMT -5
Emerging market equities have had a tough year. The Russian invasion of Ukraine saw the country excluded from most indices and Russian holdings removed from most funds.
In addition, China — for so long the engine of both global and emerging market growth — has suffered from geopolitical tensions with the US, ongoing issues in its real estate sector and the impact of its zero-Covid policy.
“China does a very good job of antagonising both those who are more bullish, as well as those who are more bearish, about its prospects,” says Edward Evans, emerging markets equity portfolio manager at Ashmore, pointing to the numerous top-down events which have impacted the attractiveness of Chinese equities.
He gives the example of October’s National Congress of the Communist Party, which saw president Xi Jinping consolidate his position and moves that suggest decision making will be even more centralised from now on.
Some investors see this as removing the necessary checks and balances which makes the country a less attractive investment destination, while others see the potential advantage of more enhanced policy execution -— which for an economy going through a transformation might not be a bad thing, says Mr Evans.
“Off the back of that Congress we saw some extraordinary market moves and extraordinarily bearish sentiment; but a degree of balance, or at least digestion, is required before judging the new political framework,” he says. There have been some positive moves since the Congress, points out Mr Evans, such as Mr Xi’s meeting with US president Joe Biden, and suggestions that the zero-Covid policy might be wound down.
Tech crackdown
Yet, the recent protests in China against zero-Covid have certainly not helped risk sentiment, and highlight the fact that any moves away from the restrictive lockdown procedures will be a journey, not a pivot.
Zero-Covid has stopped Chinese economic growth in its tracks, which has had a huge impact on the global economy, because “China’s growth is the world’s growth”, says Kevin Carter, founder and CIO of EMQQ Global, which invests in internet and e-commerce companies in emerging markets. In addition, it is now causing civil unrest, which makes the rest of the world even more sceptical about the country’s future.
“People have always been worried about China,” he says. “Most investors have never been to the country and are worried that the Chinese government are communists who don’t really believe in capitalism and are going to steal their money.”
This means that any time the government does something which worries investors, it feeds into this negative viewpoint and scares them off. Mr Carter gives the example of the crackdown against online education and tech companies, which did see some investors lose money, but he believes that many of the reforms were needed.
Investors can try to avoid China, says Nick Payne, lead investment manager for the Jupiter Global Emerging Markets Funds team — and who has a relatively low weighting at the moment — but those who do are ignoring a dynamic economy which is an interesting and potentially very lucrative place to invest. “It’s just a bit more challenging because of the completely different nature of its political system.”
A lot of people forget two very important points in China, he says. Firstly, Bejing’s policy-making has generally been very pragmatic over the years. “The authorities see a problem, maybe they take some time to respond, but they do respond.”
Secondly, China is one of the few emerging markets to actually emerge over the last 30 years. “And the route out of the extreme poverty of the 1970s and 1980s has been capitalism,” adds Mr Payne. “It’s been capitalism with Chinese characteristics, but it has been capitalism, it has been innovation.”
Beijing knows the ongoing growth of its economy will require capitalism, so it will continue, he says, although he also cautions investors to be carefully tuned to the direction of travel the party wants to go in, which it does generally communicate.
Bright spot
If recent events have scared investors off China, then one country which seems to have benefitted has been India. While Beijing has struggled with its zero-Covid policy and the impact of its reforms in the tech sector, the longevity and stability of Narendra Modi’s government has been a major boon.
“What you’re seeing in the Indian economy is a cumulative, delayed effect from the reforms that were carried out a few years ago, like the goods and services tax, demonetisation and general progress towards some of the technological initiatives that the Indian government has put in,” says Mr Payne.
Inflation in the country is pretty stable, he says, pointing out that in any case, most emerging market economies are used to dealing with numbers in the mid-single digits. And that needs to be balanced against the real growth being seen in the Indian economy.
“With what is going on in the developed markets, it is easy for people to lose sight of the fact that many economies, be it India, Indonesia or elsewhere, are all still growing. None of the countries that we are looking at in emerging markets are anywhere near a sustained recession of any kind,” asserts Mr Payne.
It is certainly true that Indian equities are expensive, though he says that they have never really been cheap. “But it’s the wrong way to look at it in any case,” says Mr Payne. “They are not cheap because the runway of growth in India is spectacular and people are prepared to pay a higher multiple to buy that future growth.
“Trying to go bargain hunting in India seldom works. What you want to do is buy proven winning franchises that actually have the ability to convert that economic growth into their own growth, corporate profitability, and ultimately returns to shareholders.”
India is underrepresented in global markets, irrespective of what’s happening to China, believes David Cornell, manager of the India Capital Growth Fund from Ocean Dial Asset Management.
In addition, China — for so long the engine of both global and emerging market growth — has suffered from geopolitical tensions with the US, ongoing issues in its real estate sector and the impact of its zero-Covid policy.
“China does a very good job of antagonising both those who are more bullish, as well as those who are more bearish, about its prospects,” says Edward Evans, emerging markets equity portfolio manager at Ashmore, pointing to the numerous top-down events which have impacted the attractiveness of Chinese equities.
He gives the example of October’s National Congress of the Communist Party, which saw president Xi Jinping consolidate his position and moves that suggest decision making will be even more centralised from now on.
Some investors see this as removing the necessary checks and balances which makes the country a less attractive investment destination, while others see the potential advantage of more enhanced policy execution -— which for an economy going through a transformation might not be a bad thing, says Mr Evans.
“Off the back of that Congress we saw some extraordinary market moves and extraordinarily bearish sentiment; but a degree of balance, or at least digestion, is required before judging the new political framework,” he says. There have been some positive moves since the Congress, points out Mr Evans, such as Mr Xi’s meeting with US president Joe Biden, and suggestions that the zero-Covid policy might be wound down.
Tech crackdown
Yet, the recent protests in China against zero-Covid have certainly not helped risk sentiment, and highlight the fact that any moves away from the restrictive lockdown procedures will be a journey, not a pivot.
Zero-Covid has stopped Chinese economic growth in its tracks, which has had a huge impact on the global economy, because “China’s growth is the world’s growth”, says Kevin Carter, founder and CIO of EMQQ Global, which invests in internet and e-commerce companies in emerging markets. In addition, it is now causing civil unrest, which makes the rest of the world even more sceptical about the country’s future.
“People have always been worried about China,” he says. “Most investors have never been to the country and are worried that the Chinese government are communists who don’t really believe in capitalism and are going to steal their money.”
This means that any time the government does something which worries investors, it feeds into this negative viewpoint and scares them off. Mr Carter gives the example of the crackdown against online education and tech companies, which did see some investors lose money, but he believes that many of the reforms were needed.
Investors can try to avoid China, says Nick Payne, lead investment manager for the Jupiter Global Emerging Markets Funds team — and who has a relatively low weighting at the moment — but those who do are ignoring a dynamic economy which is an interesting and potentially very lucrative place to invest. “It’s just a bit more challenging because of the completely different nature of its political system.”
A lot of people forget two very important points in China, he says. Firstly, Bejing’s policy-making has generally been very pragmatic over the years. “The authorities see a problem, maybe they take some time to respond, but they do respond.”
Secondly, China is one of the few emerging markets to actually emerge over the last 30 years. “And the route out of the extreme poverty of the 1970s and 1980s has been capitalism,” adds Mr Payne. “It’s been capitalism with Chinese characteristics, but it has been capitalism, it has been innovation.”
Beijing knows the ongoing growth of its economy will require capitalism, so it will continue, he says, although he also cautions investors to be carefully tuned to the direction of travel the party wants to go in, which it does generally communicate.
Bright spot
If recent events have scared investors off China, then one country which seems to have benefitted has been India. While Beijing has struggled with its zero-Covid policy and the impact of its reforms in the tech sector, the longevity and stability of Narendra Modi’s government has been a major boon.
“What you’re seeing in the Indian economy is a cumulative, delayed effect from the reforms that were carried out a few years ago, like the goods and services tax, demonetisation and general progress towards some of the technological initiatives that the Indian government has put in,” says Mr Payne.
Inflation in the country is pretty stable, he says, pointing out that in any case, most emerging market economies are used to dealing with numbers in the mid-single digits. And that needs to be balanced against the real growth being seen in the Indian economy.
“With what is going on in the developed markets, it is easy for people to lose sight of the fact that many economies, be it India, Indonesia or elsewhere, are all still growing. None of the countries that we are looking at in emerging markets are anywhere near a sustained recession of any kind,” asserts Mr Payne.
It is certainly true that Indian equities are expensive, though he says that they have never really been cheap. “But it’s the wrong way to look at it in any case,” says Mr Payne. “They are not cheap because the runway of growth in India is spectacular and people are prepared to pay a higher multiple to buy that future growth.
“Trying to go bargain hunting in India seldom works. What you want to do is buy proven winning franchises that actually have the ability to convert that economic growth into their own growth, corporate profitability, and ultimately returns to shareholders.”
India is underrepresented in global markets, irrespective of what’s happening to China, believes David Cornell, manager of the India Capital Growth Fund from Ocean Dial Asset Management.